Three Cash Flow Solutions That Cure Overspending

Do you often find yourself in a fiscal squeeze at the end of the month? If so, there are 3 cash flow solutions that can solve this – “mucho pronto”. Let’s dive in.

1. Get Your Terms Right

American inventor Charles Kettering said that a problem well stated is a problem half solved. So let’s take a moment to really understand “cash flow” because it’s far different from “overspending”.

When you buy something you can’t afford, you’ve overspent. This is true whether or not you happen to have the cash or not. The solution for this is to abstain from buying the “thing”.

Now if you buy something you can afford you can still have cash flow problems. This happens when you just don’t happen to have the cash at the moment. The solution for this is to manage your cash flow better.

These are two very different solutions to two very different problems. As you can see, the trick is to determine whether or not you can afford the “thing” or not and then manage your cash flow.

2. How to Know if You Can Afford it or Not.

There is only way to know if you can afford something or not and that’s to maintain a budget. Before you curl up in a fetal position or throw your hands up in surrender, keep in mind that maintaining a budget doesn’t have to be difficult.

One simple way to budget is to use my quick three step method. First run a mini-financial plan. This will tell you what you spend on average each month and how much you need to save each month in order to reach your long term financial goals as well.

Next, you’re going to open up 3 accounts. In the first account, deposit the amount you spend on average each month. That will be the account you use to pay your expenses as they come in each month. Once you deposit the money, consider it spent. If at the end of the month you have anything left over, leave it alone. Remember that you are working with average spending. You’ll spend more in some months and less in others.

The second account you open will be an investment account. Don’t worry. You can open this account with as little as $25. You’re going to use this investment account to automate your savings. When you ran your mini-plan, you figured out what you need to save each month, remember? Set up an automatic deposit into this investment account for that amount.

The third account is your fun money. If you have any amount left after you’ve taken care of the first two items, this is money you can afford to spend on anything you like.

A more involved solution is to use a software package like YNAB (You Need a Budget). This essentially sets aside money for your short-term and long-term needs but it also allows you to budget for the object of your desire. When you accumulate the needed cash, that’s when you can afford it. I love YNAB and so far I’ve heard nothing but accolades from other Pilgrims who are using it too.

Whichever method works for you, just make sure you stick to it. But keep in mind that the only way to know if you can afford something or not is indeed to use some type of tracking system.

3. Cash Flow Management

If you follow one of the budgeting systems I described above you’ll know when you can afford things ….most of the time. At the very least, you won’t spend money you don’t have and that’s a great start. But there are times when you actually can afford something, justifiably need to spend the money yet don’t have the cash at the moment.

Let me provide an example. Let’s say your quarterly car insurance payment is $210. You’re a smart cookie so you set aside $70 a month for that expense. But if you’re first payment comes due in 2 months, you’ll only have $140 available to pay for a $210 expense. I’m no Einstein but according to my best calculations, that math won’t work. How can you avoid this from happening?

Your best approach is to have a sufficient emergency buffer. Some people need 3 months average expenses and some need more. It depends on your personal situation. But if you have a big enough emergency fund set aside and don’t use it for fun money, you will have the money you need when you need it. This emergency money could be sitting inside your first account. That’s how I do it anyway.

In summary, your budget and emergency stash are your spending and cash flow solutions. If this is new to you, rest assured that you can put all this into place very easily. Slow down and take one step at a time. Send me an email if you have questions. Let me know about your success as well.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Primary Sidebar

Who is Neal Frankle

I'm a Certified Financial Planner™ with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim. Read More »

More Categories

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.